Bank of Japan to keep interest rates steady as rising inflation points to hike at year-end

  • The Bank of Japan will keep interest rates steady on Thursday.
  • All eyes will be on the BoJ’s quarterly forecasts and Governor Kazuo Ueda’s press conference.
  • The Japanese Yen could face intense volatility due to the risk of the BoJ event.

The Bank of Japan (BoJ) is widely expected to keep its short-term interest rate around 0.25%, following the conclusion of its two-day monetary policy review on Thursday.

The BoJ’s decision will be accompanied by the bank’s quarterly outlook report, which will be published around 3:00 GMT. Governor Kazuo Ueda’s post-monetary policy meeting press conference will be held at 06:30 GMT.

What to expect from the BoJ interest rate decision?

The BoJ is likely to keep interest rates unchanged for the second consecutive meeting after announcing a surprise 15 basis point (bps) hike in July.

With a status quo outcome fully priced in, the central focus will be on the BoJ’s communication regarding future rate hikes, given Japan’s recent underlying inflationary trends, the rapid depreciation of the Japanese Yen (JPY) and ongoing political turmoil. Japan’s ruling Liberal Democratic Party (LDP), led by Prime Minister Shigeru Ishiba, lost its parliamentary majority in snap elections on October 27, the first time in 15 years.

In that sense, the central bank’s updated projections on inflation and economic growth will play a crucial role in the market’s assessment of the pace and timing of future BoJ rate hikes.

Tokyo inflation data, a leading indicator of national trends and a key factor the BoJ will examine at its policy meeting, showed on October 25 that the headline Consumer Price Index (CPI) rose 1.8% year-on-year (YoY) in October, down from September’s 2.1% growth.

Meanwhile, the BoJ’s broader and much-watched price trend indicator, the “core CPI” – excluding both fresh food and energy costs – rose 1.8% year-on-year in the same period, accelerating from a rise of 1.6% in September.

This indicator suggests that underlying price pressures remain in a gradual upward trend, forcing the BoJ to consider a rate hike at its December policy meeting.

Hardline expectations could find additional support in uncertainty surrounding the Japanese political situation, which could exacerbate the pain in the battered local currency. The further decline in the Japanese Yen could also boost imported inflation and near-term inflation expectations.

The Japanese central bank is generally expected to remain in standby mode, assessing domestic risks along with uncertainties linked to the United States (US) presidential election on November 5 and the economy.

BBH analysts anticipate that the BoJ will keep its interest rate unchanged. “Ueda’s recent comments suggest there will be no policy changes at this meeting, so the focus will be on the BoJ’s policy guidance. We expect the BoJ to signal again that it is in no rush to remove policy accommodation.” , which would weigh even more on the JPY,” they said.

Looking at the updated macroeconomic forecasts, BBH analysts said they see downside risks.

How could the Bank of Japan’s interest rate decision affect USD/JPY?

The Japanese Yen hit a new three-month low against the US Dollar (USD), taking the USD/JPY pair close to the 154.00 mark ahead of the BoJ event. Further weakness in the JPY is expected following the BoJ’s likely no-change rate announcement.

The JPY, however, could make a strong recovery if the BoJ signals another rate hike in December while acknowledging the risks emanating from the domestic currency’s recent decline. The USD/JPY sell-off could be short-lived due to potential downside risks to inflation and growth forecasts.

On the contrary, if the BoJ maintains its cautious rhetoric, supporting Governor Ueda’s latest comments, the Japanese Yen could see another drop. Ueda said on October 23 that “core inflation has been rising slowly. It is still taking us time to reach 2% inflation on a sustainable basis.”

“When there is great uncertainty, you generally want to proceed cautiously and gradually,” Ueda added.

A downward revision to growth and inflation forecasts could further motivate moderates. In that case, USD/JPY will make another attempt towards the 160.00 level.

From a technical perspective, Dhwani Mehta, Lead Asian Session Analyst at FXStreet, notes: “Amid oversold Relative Strength Index (RSI) conditions on the daily chart, USD/JPY buyers seem to have turned cautious earlier. of the BoJ policy announcements. However, they remain bullish as the 21-day SMA is about to cross the 100-day SMA from below. If that happens on a daily close, it will be confirmed. a bullish crossover.”

“A dovish message from the BoJ could revive the USD/JPY uptrend, taking the pair towards the 155.00 supply zone, above which the July 24 high of 155.99 will be challenged. Higher up, The door will open to test the psychological barrier of 156.50. On the other hand, a sustained break below the critical 200-day SMA at 151.50 could drive a significant correction towards the 150.30 region, where the SMA is located. 21-day SMA and 100-day SMA are approaching,” adds Dhwani.

Economic indicator

BoJ interest rate decision

He Bank of Japan sets the interbank interest rate. This rate affects a range of interest rates set by commercial banks, building societies and other institutions towards their own savers and borrowers. It also affects the price of financial assets, such as bonds, stocks and exchange rates, which affect consumer and business demand in a variety of ways. If the Bank of Japan has a firm outlook on the Japanese economy and increases the current interest rate, this is bullish for the yen. On the other hand, a mild outlook that leads the bank to reduce or maintain current rates will be bearish for the yen.



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Central banks FAQs


Central banks have a key mandate to ensure price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the central bank’s job to keep demand in line by adjusting its interest rate. For the largest central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.


A central bank has an important tool to raise or lower inflation: modify its reference interest rate. At pre-communicated times, the central bank will issue a statement with its reference interest rate and give additional reasons why it maintains or modifies it (cuts or raises it). Local banks will adjust their savings and loan rates accordingly, which in turn will make it harder or easier for citizens to make a profit on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, we speak of monetary tightening. When you reduce your reference rate, it is called monetary easing.


A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a certain conviction about how the central bank should control inflation and the subsequent monetary policy. Members who want a very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while settling for inflation slightly above 2%, are called “doves.” Members who prefer higher rates to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is at 2% or just below.


Typically, there is a chair who leads each meeting, has to create a consensus among the hawks or doves, and has the final say when votes need to be divided to avoid a 50-50 tie on whether to adjust current policy. The president will give speeches, which can often be followed live, communicating the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance toward markets ahead of a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is what is called the silent period.

Source: Fx Street

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